What is a Payday Loan and Why is it So Bad?

Is a Payday loan or cash advance loan a convenient way to get the quick cash you need? Or are they a huge ripoff you should avoid like your chain smoking aunt Tilley with the bright lipstick wanting to give you some “Christmas Sugar” when you were a kid?

If you've been reading the CFF blog for long, you probably already know where I stand on this one.

So get ready while I step up on my soapbox.

Payday Loans and Free Lottery Tickets!

I decided to write about payday loans (also called cash advance loans) when I started seeing a commercial in my local market for a cash advance/payday loan business that gives customers a free lottery ticket with each loan that is written.

How awesome is that?

Encouraging a questionable borrowing decision with a 1 in 170 million shot at winning the lottery. This represents a level of dumb that I hoped did not exist in the world. But alas, my hope is misplaced. I have found myself profoundly wrong about people's poor decisions when it comes to money.

It seems that many of the customers who use short term loans don't always realize just how badly they are getting ripped off.

So let's start out by discovering just what is a payday loan and why they stink like Aunt Tilley's stale cigarette breath.

What is a Payday Loan?

Payday loans are short term loans (usually 2 weeks) that are taken out against the customer's next paycheck.

First you provide the payday lender with a paycheck stub to prove you have a job. Then you provide a postdated check or authorize an auto draft for the loan amount plus fees (usually $15 per $100 borrowed, but can vary depending on the payday lender and state laws).

If you pay off the loan and fees before it comes due in 2 weeks, they will give you back your postdated check. If that happens, then the transaction is finished. However, if you don't pay the loan back in 14 days, they will attempt to cash your postdated check.

What if the Check Bounces?

You still owe the loan, and now you'll have bounced check fees from the bank. You'll also have late fees from the payday loan company to deal with. Plus the hassle of collection calls that will make your life absolutely miserable.

As you can see, payday loans can cause you problems in very short order. Especially when you realize that $15 for for every $100 borrowed comes out to an annual percentage rate of 390%!

Think about this… if you borrow just $100 every two weeks for a year, then you will have paid $390 in fees for the privilege of using $100 of the payday lender's money every 2 weeks. The total becomes astronomical if you're ever late paying a loan back.

Why Do People Use Payday Loans?

So why do people use these crazy loans? It's usually due to one or more of these 3 factors.

They're Desperate- Some people feel they have nowhere to turn when they run out of money before their next paycheck. Or they are backed into a corner if an emergency comes up. So they act out of desperation, taking the only option that will get them some quick cash to remedy the problem.

They Need to Make a Payment on Another Debt- Such as rent, or a house or car payment. This keeps them from going into default or repossession, providing a temporary fix for their problem.

They Just Don't Know Any Better- Many people who use payday loans or cash advances know they are getting screwed but they feel they have no choice. However, some don't have a clue about the real cost. They take out payday loans as a convenient service to get cash nowinstead of waiting on their paycheck. They only realize the true consequences when they eventually have trouble paying back the loan.

Easy and Convenient, or Terrible Financial Choice?

Payday loans tend to be targeted toward lower income people who live paycheck to paycheck. Unfortunately, they are the people that can least afford the huge interest rates payday lenders charge.

These loans make every customer poorer, and only add to the financial desperation that these people are experiencing.

Payday loan stores tout their cash advance services as a convenient way to get money fast, which is true. But in the end, they suck the life out of your financial situation. Payday loans keep you poor, desperate, and in perpetual debt.